Closing the Michigan Public School Employees Retirement System to new employees is on the agenda of Michigan House leaders this year. Because the state underfunds pensions, the necessity of closing the current defined-benefit pension system and offering new employees a defined-contribution plan is clear.
According to the legislative auditor general, the system has been underfunded in all but one of the past 30 years, and it now carries a $25.8 billion unfunded liability.
Skyrocketing Costs
To eliminate the current unfunded liability, the state would have to pay at least $1.9 billion per year in “catch-up costs,” a number which will only increase.
The system puts taxpayers at risk, but future school retirees have the most to lose. Under the current system, their economic security depends on the state continuing to make multibillion-dollar contributions over the next generation, a duty it has failed to perform adequately over the past generation.
Acknowledging the Problem
Most of what is said by officials and politicians opposed to closing the current system are distractions that ignore the basic underfunding problem.
For example, some claim a defined-contribution system would cost more than defined-benefit pensions. But with the state underfunding the current system, the cost comparisons between the “normal cost” of defined-benefit plans, which don’t include catch-up costs, and the employer costs for defined-contribution plans give misleading results.
Other questions, such as how the system would influence schools’ ability to attract quality employees, how to address transition costs, and the effect of market volatility are also important, but they miss the reason pensions have to be reformed.
Policymakers need to acknowledge the main problem of the pension system and ensure they contain its ability to develop further unfunded liabilities.
James M. Hohman ([email protected]) is assistant director of fiscal policy at the Mackinac Center for Public Policy. An earlier version of this story appeared at the Mackinac Center’s The MC blog, at http://www.mackinac.org/blog.aspx/. Reprinted with permission.
